Have you ever heard of the Community Reinvestment Act (CRA)? If not, you
should have. It is among the factors responsible for the worst housing
crisis in America since 1932. CRA was enacted during the Jimmy Carter
Presidency. It neither was repealed nor enforced during the Ronald W.
Reagan and George H. W. Bush Administrations. President William J.
Clinton enforced the law vigorously. CRA forced banks to make loans to
people who had little or no ability to liquidate them. This created the
subprime market which in turn created the housing bubble. That bubble
burst, as all bubbles do, leaving us with a terrible housing crisis. If
something similar were to occur in the private sector the wrath of
Congress soon would be felt.

CRA ought to be repealed. In any reasonable situation it would be. But
it won't because too many powerful interests in Washington want to see
it continue as they attempt to manipulate society to fit their ideology.
Powerful Members of Congress are talking about strengthening the law.
What does that mean? In addition to enforcing CRA, the Clinton
Administration set targets for low-income home ownership at the
Department of Housing and Urban Development (HUD) and at
government-sponsored Fannie Mae and Freddie Mac. The Federal Government
had to bail out these entities when the subprime mortgages failed. These
institutions were, in the words of a federal official, too large to
fail. Just like the insurance giant AIG and various investment firms and
banks. But a few investment firms were not too big to fail. Secretary of
the Treasury Henry Paulson determined which companies lived and which
died.

When Paulson was named Secretary of the Treasury, Myron Ebel, a
spokesman for Competitive Enterprise Institute, a free-market think
tank, called upon the Senate not to confirm him. Howard Phillips of the
Conservative Caucus wanted him fired. They were right. But Paulson alone
should not be blamed. The Chairman of the Federal Reserve, Ben Bernacke,
and the Chairman of the Securities and Exchange Commission, my old
friend Christopher Cox, all had an idea of what was coming yet they said
nothing. Paulson will leave office when President Bush leaves in
January. The others will remain. President-elect Barack H. Obama should
fire all of them, urge Congress to repeal CRA and dismantle Fannie and
Freddie. However, given the numerical strength of the Democratic Party
in Congress and its base of special interests in diversity mandates CRA
probably will not be touched. Would Representative Barney Frank (D-MA)
have an incentive to repeal it? How about Senator Christopher J. Dodd
(D-CT)? Both have received substantial political contributions from
Fannie and Freddie. How about President-elect Obama doing something?
Probably not. He was the second largest recipient of political
contributions from Fannie and Freddie. All three men have an incentive
to maintain the status quo.

Will anything be done to get at the root of the problem? It would take a
President or a Congress with unusual courage. We are unlikely to see
either for many years. Remember those commercials by President George W.
Bush during his 2004 re-election campaign which bragged that Bush had
encouraged more home ownership than at any time in American history?
Right. At our expense. And by giving more loans which people could not
afford to pay back. When Republicans controlled Congress they paid lip
service to the problem. They proposed remedial legislation, which
Democrats blocked, and they never said a word about it after that.

There is enough blame to go around in this mess. To tackle this serious
problem we will need a different kind of President and Congress.